I am saying: Inflation is when a country increases its supply of money and therefore devalues the currency
The other guy is saying: Inflation is an increase in the overall price level. It is not necessarily related to the supply of money.
Can anyone help me out here? Can anyone find a scholarly article that supports my argument?
Many, many thanks.
Can’t help on an article but here is a blog entry I have on it which is an extract from one of my uni essays- I hope it helps.
Thanks, physiocrat.
Incidentally I found a decent link myself: http://mises.org/daily/2781
BTW, I love your Che t-shirt pic haha. I get pissed whenever I see ignorant college kids walking around wearing t shirts with his face on the front
You can buy them here
I own one too- it’s great.
Dictionary.com states it as:
Economics. A persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.
American Heritage Dictionary:
A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.
Inflation in the economics sense is basically when there is more of something making it worth less (supply and demand). So if there are more apples one season, one could say that there’s an “inflation of apples” dropping the real value of apples. Likewise, if the credit supply is increased, there’s a decrease in the real value of one unit of that currency.
However, “prices rise” with monetary inflation because we use that currency as a means of exchange, while in reality the real value of the products you purchase remain the same (we’re assuming supply/demand remain constant) while the real value of your money has dropped (due to increased supply).
If you’re still interested, I wrote an essay about this. I explain why demand pull and cost push inflation do not actually occur in the absense of a rise in the supply of money relative to the amount of available goods. In other words, I explain why inflation must necessarily occur as a result of increases in the money supply.
From my 1977 Webster’s New Collegiate Dictionary:
inflation 1: an act of inflating: a state of being inflated: as a: DISTENTION b: empty pretentiousness : POMPOSITY 2: an increase in the volume of money and credit relative to the available goods resulting in a substantial and continuing rise in the general price level
The word ‘inflation’ used to refer specifically to the expansion of money and credit. Rising prises are merely a consequence. This only makes sense. Prices don’t ‘inflate.’ They go up or down, but they don’t ‘inflate.’ The tendency to use the word to refer to higher prices instead of expansion of the money supply (or to expansion of the money supply only when it causes higher prices) was and is part of a conscious attempt to obfuscate the true nature and purpose of paper money and artificial credit, which is of course to allow banks to lend and invest–and governments to spend–money they don’t really have.
Inflation (i.e. price increases) is caused by price increases… how, umm, deep…
Cost-push “inflation” is rubbish. As resources become increasingly scarce it is only natural that their prices should rise. No “inflation” is occuring at all. Price increases are symptomatic of excess increases in the supply of money relative to demand for it. There is no such thing as “inflation” caused by them. And anyway, what sense does it make to say prices have “inflated”? They only rise or fall, they do not inflate; applied to a stock concept like money though, the term begins to seem much more apposite.
“What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. (Mises, [ http://store.mises.org/Planning-for-Freedom-P54C0.aspx ]Planning for Freedom, 79)”
" As resources become increasingly scarce it is only natural that their prices should rise."
This is kinda off topic, but they don’t. The market usually starts providing substitutes…
Anyone familar with Jullian Simon and Paul Ehrlich?
Calling a rise in prices “inflation” as its exclusive definition is nothing but obfuscation. It is impossible for the money supply to increase without an accompanying rise in prices. So it is correct in either case to say that inflation is a rise in the money supply, since that effects a rise in prices as well. However, Keynesians (and some monetarists) will insist that there is no link between quantity of money and price. Those people are, frankly, not worth the trouble. It’s like trying to talk about medicine with someone who doesn’t believe in germs.
I’m pretty sure that Inquisitor was abstracting for the purpose of simplifying the relationship’s structure, not making a rudimentary mistake.
Actually, even with your consideration he is not wrong: the market will provide substitutes only after the price of the more precious commodity has risen enough to justify the bidding away of capital by competing (or substituting) firms.
Let’s be careful here. It is impossible for an inflation of the money supply to not raise prices higher than they otherwise would have been. Sometimes prices go down because there are more goods and services available than before relative to a given amount of money. An increase in the money supply might only force prices up as much as prices would have gone down anyway, resulting in a steady price level. This is exactly what happened in the 1920s. The banks inflated the money supply, but prices only held steady. Had the banks not inflated, prices would have gone down. Prices didn’t rise, but it was still inflation. And it still lead to an economic crash.
Yeah, I agree with all that. I should have said “cetaris paribus.”
…or, when asian markets started to supply increased amounts of cheap products into american markets, FED had noticed an opportunity to steal the huge part of that ne purchasing power, and they did, by increasing quantity of money.
To a casual observer, the result was that asian trade brought prices down.
A reality was, however, that the asian trade brought prices down a lot, multiples over the noted decrease, that was compensated by dollar devaluation with the difference in purchasing power gobbled up by FED.
We cannot afford to buy at old price level, but we aren’t even trying. That is why price inflation is not as pronounced as it should be.
cetaris paribus..
I always maintain that the definitions of words should be used in their most popular usages. Otherwise, you simply create a language barrier to those who haven’t studied your line of thought. For example, we shouldn’t go around saying we’re liberals, even though we’re classic liberals. This simply confuses people who label us and write us off for one reason or another. Only the left-leaners will listen to a self-described liberal…until we start claiming that FDR was our worst president. Thus, we get no audience. See what I mean?
I think the most common usage of inflation (like you’ll hear on TV) is a general rise in prices. I think this is how we should use it. As such, inflation can occur due to factors other than expanding the money supply, such as sharp increases in oil prices rippling through the whole economy.
When referring to money supply expansion, I say monetary inflation. This does not necessarily indicate there will be inflation, as defined above, such as in the 1920’s.
While obviously linked, they are not absolutely linked, and we should keep that in mind when such terms are thrown around.
The increase of the overall price levels is a result from the increase of the money supply. As the money supply inflates and circulates into the economy, your money is worth less and as a result the prices of goods/services begin to rise.
Inflation is the increase in the overal price levels resulting from monetary intervention, a.k.a, expanding the money supply.
While I agree that the term “monetary inflation” serves well to make it clear what we mean by the term “inflation,” I think the above is a good example of why we shouldn’t just let the incorrect use of the term “inflation” go unchallenged. The increase in oil prices has never been the cause of a general rise in prices in the economy. Rather, oil prices are merely first to manifest a devaluation of the dollar. This is by design. In 1973, the U.S. government made an agreement with the House of Saud to keep them in power. In exchange, Saudi Arabia would only accept dollars in payment for oil. The rest of OPEC soon followed suit.
This has two effects: 1) It helps keep the no-longer-gold-backed dollar in circulation as a world currency (thus allowing the banking interests to spread the effects of (monetary) inflation across the economy of the entire world. 2) It allows the banking interests to put forth the lie that rising prices in general are caused by rising oil prices.
In short, we should never allow deliberate economic fallacies to go unchallenged, and the use of the term “inflation” to refer to rising prices is exactly that. It always has been.
P.S. In 2000, Saddam Hussein started demanding euros for oil instead of dollars. Iran switched to euros and yen last year. Many people (including myself) are convinced the real purpose of the invasion of Iraq and the current belligerence toward Iran is to try maintain the dollar’s quickly eroding status as a world reserve currency.
I totally agree about the petro-dollar and am not blaming current oil price rises for inflation. I’m sure 99% of our inflation is due to monetary inflation. However, human speculation and consequent demand is another aspect of pricing. If gold was simply priced according to a ratio of dollars to gold, it would never have a falling price.
In true energy emergencies or shocking situations where massive amounts of labor or whatever disappear, we should expect inflation in addition to its main cause of expanding the money supply.